How Volkswagen Became A Victim Of Realpolitik

What if we told you that the whole drama surrounding Volkswagen’s diesel engines’ emissions scandal is more about realpolitik rather than genuine concerns for the environment? Realpolitik, as coined by German philosopher Ludwig von Rochau, places a nation’s own practical interest above idealistic pursuits – in this case, the interest of domestic industries over the environment.

Yes, Volkswagen used some cheat codes (literally!) to pass the US EPA’s exhaust emissions testing, but nothing is ever black-white.

The ones who are upset with Volkswagen – the US Environmental Protection Agency (EPA) and the Congress – are the same people who resisted against imposing stricter environmental regulations on American-made trucks.

The EPA’s real role – Protecting America’s Big 3

Beyond its borders, representatives of the US government often expound the virtues of free trade. In reality, the US government protects its domestic manufacturers from foreign competition via an unnecessarily complicated set of regulations.

A Cadillac Escalade consumes 11.2-litre/100 km but it is exempted from the gas guzzler tax because the EPA says it’s a truck and trucks help people get work done. A Mercedes-Benz S600 consumes the same but it is slapped with a USD1,700 tax.

Peculiarities in the Corporate Average Fuel Economy (CAFE) regulations also meant that passenger cars are required to cut their fuel consumption by 5 percent annually until 2025, while pick-up trucks and SUVs only need to cut by only 3.5 percent annually.

So a Honda Fit needs to work harder than a Chevrolet Suburban in reducing fuel consumption.

A 25 percent import duty on imported trucks meant that a Thailand-made, relatively efficient 2.2-litre four cylinder Ford Ranger would be more expensive than a US-made, 3.5-litre V6 Ford F-150 if it was sold in the US.

By taking advantage of its large 17 million vehicles domestic car market, the US’s policy is to promote super-sized vehicles that are so big that it is not viable for foreign car manufacturers to produce them.

America’s Big 3 – General Motors, Ford, and Chrysler, rely heavily on trucks - a loosely used term in the US as it can also refer to truck-based SUVs.

General Motors for example, relies on trucks (including SUVs) for nearly 75 percent of its total sales! The passenger car segment is dominated by Asian and European brands.

This explains why many vehicle safety and environmental regulations in the US are often tilted in favour of trucks over passenger cars.

Volkswagen Stood Up To Bullying By EPA

Most car companies accept the tilted playing field as the cost of doing business in the US, the second largest car market in the world after China.

Some companies like Toyota and Nissan, poured huge amounts of money to develop and build a large truck for the US market (Toyota Tundra and Nissan Titan) but others are less willing.

In 2011, the then-President and CEO of Volkswagen Group of America, Jonathan Browning, voiced his dissatisfaction with the EPA’s bias towards trucks in the proposed 2025 CAFE targets.

Browning said “…Volkswagen would like to see the same flexibilities and alternative compliance paths afforded the heaviest trucks be available to the smallest, already fuel-efficient passenger cars,” adding that the proposal is not technology neutral.

“A lot of good work has been done, but there is room and a need for some improvements to keep a level playing field for all automakers to attain the challenging new goals,” he added.

At the same time, the then-CEO of Volkswagen AG Professor Dr. Martin Winterkorn was putting great pressure on Browning to deliver 800,000 unit sales by 2018, nearly four times higher than the company’s results in 2010.

This unrealistic demand and would later push Volkswagen’s engineers to plant a cheat code on their TDI engines.

Enter The ICCT

Despite its rather authoritative sounding name, the International Council on Clean Transportation (ICCT) does not represent any government, environment or consumer rights body.

Its website lists several US-based organisations as its donors - ClimateWorks Foundation, the William and Flora Hewlett Foundation, the European Climate Foundation (despite its ‘European’ name, it is affiliated to ClimateWorks), and the Climate and Clean Air Coalition.

Witch Hunting Diesel-Powered Foreign Cars

More than 65 percent of all cars sold in Europe are diesel-powered. Europe’s CO2-based regulations and high fuel tax favour diesel engines, which are often more fuel efficient than many hybrids.

Of late, especially with the introduction of Euro 6 standard in 2014, the focus has expanded to include NOx emissions, a weak point for diesel engines but can be addressed (with added cost) using exhaust after-treatment technology.

The promise of clean emissions, low fuel consumption without sacrificing powerful performance is what sets European car manufacturers from Japanese hybrids.

Audi, Volkswagen, Mercedes-Benz and BMW have been actively promoting the benefits of European clean-diesel technology to woo American drivers, who would have otherwise gone for a Japanese hybrid, to their side.

At the same time diesels are gaining popularity in the US, the ICCT has since 2012, published a series of papers attacking clean diesel technology and the European Union’s New European Driving Cycle (NEDC) standard, alleging that the test is not realistic and that the differences between real-world fuel consumption and NEDC’s test values are widening.

The papers alleged that many car companies are gaming standardised laboratory testing by manipulating legal loopholes.

ICCT gathered its real-world consumption data from spritmonitor.de, a third party website where users input their vehicle’s real-world fuel consumption data. As it is not possible to measure real-world CO2 emissions on a large scale, ICCT used fuel consumption to estimate a vehicle’s real-world CO2 emissions.

Curiously, ICCT actually commended Volkswagen in 2014 for producing real-world fuel consumption (and therefore similar levels of CO2 emissions) that’s very close to its claimed figures!

Instead, it accused Mercedes-Benz and BMW models of producing the most divergence, but as we would know later, this was not the case.

The ICCT didn’t uncover anything new. European regulators have long been aware that there are gaps between real-world and laboratory test results, mostly due to clever manipulation of legal loopholes (perfectly legal).

To stay one step ahead of the manufacturers, the European Union had in 2008, already proposed to replace the current NEDC standard used to test exhaust emisions and fuel consumptions, with a more rigorous Worldwide harmonized Light vehicles Test Procedure (WLTP), which will be phased-in in 2017.

In 2013, Germany’s ADAC’s Prof Dr-Ing Reinhard Kolke presented a paper titled ‘Cycle beating: How are OEM’s optimising the vehicle to test cycles?’ to the International Energy Agency.

Professor Kolke explained that among the loopholes commonly exploited are:

Adjusting the measurements of the exhaust emissions down by 4 percent (the maximum permissible tolerance)

Overinflating the low rolling resistance tyres

Removing unnecessary weight from the car – within legal limits. Commonly removed parts are roof rails, front fog lamps, and even passenger-side wing mirror. Air-conditioning and other ancillaries are switched off

Dynamometer is calibrated to different, more favourable vehicle weight category, again this the exploiting tolerances provided

A specially developed robot is used to control the throttle during testing. The robot is able to maintain a driving speed that is precisely 2 km/h less than that target driving speed, exploiting to 2 km/h tolerance provided

The test chamber is kept at an optimal 29 degrees Celsius

Disconnecting the alternator, and installing a specialised software in the engine’s computer are illegal – the latter was what got Volkswagen in trouble.

Professor Kolke explained that by taking advantage of all the permissible tolerances in NEDC testing, discrepancies of up to 20 percent are possible.

Rather than wasting time prosecuting manufacturers, the EU simply worked on tightening its testing standards.

We should point out that governments around the world only consider standardised laboratory testing results.

Ever since the scandal broke, many newspapers have carried out reports that many other manufacturers are also emitting higher emissions than claimed, alleging that other manufacturers are also cheating.

This is wrong and reflects on a poor understanding of emissions regulations.

To say that a laboratory test is unrealistic is moot because the other alternative of using real-world driving results is even more unrealistic as those results are not repeatable across different drivers, different cars, different driving and weather conditions. What is realistic for driver A who lives in area X is not realistic for driver B who lives in area Y.

As explained by Professor Kolke, the two should not be compared. The primary criteria when deciding on a standardised test is repeatability. Correlation with real-world driving is useful but it is a secondary criteria.

Over in the US, the West Virginia University was hired by ICCT to conduct real-world emissions test on a few European diesel cars. The damning results for the Jetta and Passat TDI gave the US EPA the silver bullet it needs to put a stop to the increasing popularity of diesel-powered European cars coming to the US.

The fact that Volkswagen had excessively rigged its cars (NOx emissions on a Jetta TDI was 35 times over the limit!) was just a bonus.

As expected, the ICCT was very pleased with itself.

“This is a powerful affirmation of U.S. federal and California vehicle emission regulations, and of the agencies” said Drew Kodjak, ICCT's Executive Director on EPA’s decision to investigate Volkswagen. “Clear protocols, in-use requirements for the useful life of vehicles, clear enforcement follow-through, the authority to fine and force recalls—these are 'best practices' that regulations worldwide should incorporate, and today's announcement shows why."

Korea Buys Time For Hyundai and Kia

For a country where just over 15 percent of total new cars sold are foreign brands, Korea seems unusually interested to prosecute Volkswagen. Even when combined with Audi, the Volkswagen Group’s market share in Korea stands at just over 4 percent.

Still, the Korean government is demanding that Volkswagen Korea’s CEO Thomas Kuehl to explain himself at a parliamentary audit.

Last year, Volkswagen slashed prices of its Passat TDI from 42 million Won to 38.9 million Won, forcing Hyundai to reduce prices of its flagship Aslan from 39.9 million Won to 38.9 million Won. Sales of the premium Hyundai models have been severely affected by the increasing number of imported models.

Sales of the Aslan is now averaging at just 800 units/month, less than the 1,000 plus per month targeted by Hyundai, despite throwing additional 1 million Won discount to existing Hyundai owners (which covers just about any Korean).

With the signing of the Korea-USA FTA in 2012, Volkswagen have been importing many US-made models into Korea. Sales of imported cars in Korea grew from less than 3 percent in 2005 to nearly 20 percent in 2015. As a result, diesel-powered Volkswagen, BMW and Mercedes-Benz models have been eating into the sales of high-end Hyundai and Kia models.

China is indifferent

In the same way Korea is quick to train its guns on Volkswagen, China prefers to look the other way. Volkswagen counts two state-owned companies as its local partners – SAIC and FAW, both are very influential companies with close ties to the Chinese central government.

China’s quality oversight body the General Administration of Quality Supervision, Inspection and Quarantine has so far only said that it is ‘concerned about the matter,’ but declined to confirm if it will investigate the company.

Volkswagen China has announced that it will be recalling 1,950 TDI models, a miniscule figure in China – 1,946 Tiguans and 4 Passats – in the near future for a software fix.

China is a petrol-dominated car market and consumers there are indifferent about the so-called ‘dieselgate’ scandal. China is Volkswagen’s largest market, bigger than even Germany.

Surprise – Prices of Volkswagen TDI models went up!

After the scandal broke, the US government has retracted its certification for Volkswagen’s TDI models, thus making them illegal for sale.

However, data from price comparison website TrueCar.com, obtained by Bloomberg, showed that the remaining TDI models at dealer’s lot were actually sold at a premium, 13 percent higher than before the scandal broke.

These cars probably went to enthusiast drivers, who didn’t care about their TDI’s exhaust emissions and wanted to buy the existing models quickly because they knew that later models will certainly have their TDI engine’s power output reduced to meet EPA’s requirements.

Who else will gain from this? Toyota

The biggest indirect beneficiary of this is scandal is Toyota, still the world leader in hybrid technology. When the Prius first came out in 1997, European manufacturers brushed it aside as an inferior technology to their clean diesels – which deliver comparable fuel economy with much better performance.

However Toyota saw something that many can't – that clean diesels, with its high fuel efficiency and low C02 emissions are only good in the short term. Toyota believes that diesels' inherently poor NOx output will eventually become their undoing.

My colleague Daniel Wong once posed a question to a Toyota engineer involved in the Prius, on why didn’t they develop diesels instead? The engineer answered in a very nonchalant manner, “Because NOx. You will see, eventually regulations will catch up with NOx and everyone will have to go down the hybrid route.” He made that comment nearly ten years ago, and true enough, Toyota’s predictions were spot on.

To control CO2 and NOx down to a permissible level to meet the latest EPA and Euro 6 emission standards, diesel particulate filters (DPF) and exhaust after-treatment technology, commonly known as SCR or AdBlue, are required and this adds cost.

Volkswagen was forced to cheat when it was not able to meet EPA’s emission standards without resorting to expensive DPF and SCR, which will significantly raise the prices of its cars.

After 20 years of development, Toyota's hybrids powertrains now matched the thermal efficiency of clean diesel engines, minus the problems with NOx.

At some point, petrol-electric hybrids will be the more logical solution and this explains the late scramble by almost every European manufacturer to produce a hybrid car.

Throughout the scandal, Toyota has been quiet on the sidelines but you can bet that within the hallways of its engineering centres in Aichi, Japan, Toyota engineers are smugly saying “I told you so.”

While the company still produces a small number of diesel engines for its European market models, the company is confident that it doesn't need diesels to meet its future environmental targets. A look at the company's "Toyota Environmental Challange 2050" presentation revealed that diesels don't matter much in the company's long-term plans. It's hybrids, plug-in hybrids, fuel cell hydrogen power and battery electric vehicles.

As someone who appreciates cars not just for their horsepower value but also for their cultural significance, he is interested in the art of manufacturing and selling cars just as much as driving them. Prior to swapping spread sheets for a word processor, he spent his previous life in product planning and market research.